Securing Finance for your Home

Securing Finance for your Home

Meet Mortgage Broker Dean Pinney

Building a new home can be an exciting time, whether it’s your first home or an investment property, but there are costs that you need to budget for when building your new home.

We talk to Dean Pinney from Flex Lending Solutions about securing finance for your new home in 2019.

Dean Pinney is a local Wagga MFAA accredited broker with a Diploma of Finance and Mortgage Broking Management with over twelve years working in the Finance and Real Estate industries.


What do I need to budget for when building a new home?
  • Deposit
  • Upfront costs to the builder
  • Stamp duty
  • Conveyancing fees
  • Property inspection fees
  • Lenders Mortgage Insurance (LMI)
  • Home loan costs.

Your mortgage broker will be able to provide you with an accurate estimate of the budget required.


How do I apply for a home loan?

There are many different types of home loans and every lender has different lending criteria. Not all loans suit all people, or situations.

This is why it’s important to do thorough research before committing to a loan, after all it’s the biggest debt you will have, and it will potentially be with you for many years.

You could go to each bank and discuss your needs with them individually which will take hours of time and effort, or you could use a Mortgage Broker who will do much of the boring groundwork for you and give you the best solution (or options) for your individual needs.

Mortgage Brokers also have access to many lenders who you would not normally have access to. Many of these lenders offer better interest rates and/or more flexible policies to give you a better, more suitable loan for your needs.


What information will I need to gather to apply to finance my new home?
  • Identification Documents for each person on the loan – typically driver’s licence and/or passport (for photographic ID) and a Medicare Card as a minimum.
  • Income Statements – PAYG (wages or salaries) – usually your last two payslips (in some circumstances such as casual income you may require additional documents).
  • Tax Returns and Notice of Assessments – to show that the income is consistent. You may also need a letter from your employer stating the terms of your employment, how long you have worked there for and expected continuing conditions. If self employed – usually the last two years Business Financials, Personal Tax Returns and Associated Notice of Assessment.
  • The last three months of Transaction Account Statements.
  • The last three months of Personal Loan & Credit Card Statements.
  • If refinancing (Land Loans or additional Security Property as part of any increase) – the last six months of Existing Home Loan Statements.
  • Proof of Deposit/Own Funds – Savings Account Statements (at least three months savings history showing consistent savings being deposited with little, or preferably no withdrawals).
  • Rates Notice for existing properties (if applicable).


What is pre-approval and how long does it last?

Pre-approval is usually requested when you have not yet found a property (or have not quite finalised the purchase price of one) however, you would like to know if the bank will approve you.

Pre-approved applications usually last for 90 days, although this may sometimes vary. Formally approved loans will also usually last for 90 days.

If the 90 days lapse, the application may need to be re-submitted, however, this usually only requires minimum documentation updates before being approved again.

It is important to note that pre-approval may still be subject to some conditions, a suitable valuation of the purchased property being a common one.


What is Lender’s Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) is an insurance that protects the BANK.

It is paid when a deposit of LESS than 20% is available. The amount of LMI charged will vary depending on the amount being borrowed and the percentage of the loan above 80%.

It will also vary from lender to lender, depending on which LMI Insurer that lender is using.

For example, on a $450,000 loan on a property worth $500,000 (90%), an LMI Premium of between $7,338 and $8,931 or more may be charged.

On a $360,000 loan on a property worth $400,000 (90%), an LMI Premium of between $5,870 and $8,655 or more may be charged.

It may also change depending on the use of the loan – owner occupied or investment. It is important to note that even if a loan is approved by a lender, their LMI insurer may still decline the loan.


How do I apply for the First Home Owners Grant (FHOG)?

Each State has their own Rules around First Home Owners Grant (FHOG). In NSW the FHOG is available to individuals, or couples, who have NEVER owned a property before. In the case of a couple, neither party can have owned a property previously.

You must be over the age of 18, and an Australian Citizen, or Permanent Resident. Currently the FHOG is $10,000 and is only available on new (never lived in before) homes, or for homes to yet to be constructed.

The purchase price of the new home must not be more than $600,000. If you’re purchasing land to build a new home, the house & land must not be more than $750,000.

You must also move into the property within the first 12 months and live in it for at least six continuous months.

There are also Stamp Duty Concessions or Exemptions for first home owners. This is separate to the Fist Home Owners Grant and is available to anyone who fits the above criteria.

The difference is that you do not have to be purchasing a new home, you can also claim it when purchasing an existing property.

If the home is valued less than $650,000 you can apply for a full exemption of the duty. If the property is valued between $650,000 & $800,000 you can apply for a concession on the duty, the amount will vary depending on the value of the property.


Can I use equity in my home as a deposit for an investment property?

Yes, it is possible to use the equity in an existing property to contribute towards the purchase of another property. Equity is the difference between the market value of the property, and the value of the existing loan against that property.

In most cases you may only use up to 80% (it may be possible to increase this amount with the use of LMI) of the value of the property as equity towards the next purchase.

You should seek advice from a financial adviser like an accountant before making this decision.


What is a construction loan and how do they work?

Construction loans are used to build new homes. The Loan amount typically increases over several stages as the building work reaches milestones (the usual stages include deposit, slab, frame, kock up, fixings, practical completion – although these may vary from builder to builder).

In most cases you only pay the interest amount on the current loan balance until the construction is complete & the full loan amount is drawn. You then start paying the principle & interest amount to reduce the loan over the loan period.

You will need to have a deposit, as with ‘normal’ loans, and you will need to use these funds first, before the lender will use their money to complete the rest of the construction. All other lending criteria remain the same.


What happens if my construction costs increase?

Lenders will rely on a fixed price quote from a licenced builder in order to make their decisions on a loan approval. However, there are often modifications made during the construction process, these are called variances and it is reasonably common for variances to occur.

It is important to have an in-depth conversation with your builder at the start to ensure all contingencies are considered & included in the fixed price contract wherever possible.

Even then, variations do happen. The lender is unlikely at this stage to increase your loan, therefore it is a good idea to allow some funds for this by having additional savings on hand.

The lender will only give you the approved loan amount, you will need to provide the shortfall should one occur.


Should I pay a deposit on land or for a home without pre-approval?

The simple answer is No. Most Deposits are required for the builder to complete certain tasks, and are to cover real costs associated with the work provided.

Therefore, most are non-refundable. Once you have paid it, you will not be able to get it back, even if the loan application is then declined for some reason.

Deposits can be of considerable value, usually several thousands of dollars. If lost, it may take several months, or longer to save that amount again.

If you MUST pay a deposit prior to pre-approval, a ‘Subject to Finance Clause’ in the contract may allow you to get the deposit amount back should you not proceed with the project.

It is crucial that any ‘Subject to Finance Clause’ be in writing and included in any contract you sign. You should also seek independent legal advice prior to signing any document which locks you into a financial commitment.


Can I borrow money for stamp duty?

A more relevant question is…. Why am I borrowing money for stamp duty? If I cannot afford to pay the stamp duty up front, can I afford to buy, or build this home?

The lender will ask the same question. They will need to see genuine savings over a period of at least three months (sometimes longer).

These savings should include enough for stamp duty, plus as strong a deposit as possible. You will also need enough to cover some legal (solicitors) fee. If you were to borrow the stamp duty amount, this will be considered another debt and may affect the amount you can borrow.

 


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Mariah Foley
Mariah Foley

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